Cebon India Ltd. v. Assistant Commissioner of Income-tax

ORDER

C.L. Sethi, Judicial Member - These two appeals filed by the assessee, are against two separate orders, both dt. 18th Aug., 2008 passed by the learned CIT(A) in the matter of an assessment made by the AO under s. 147/144 of the IT Act, 1961 ('the Act') for the asst. yrs. 1999-2000 and 2000-01.

2. We shall first take the appeal pertaining to the asst. yr. 1999-2000.

3. Ground Nos. 1 and 2 are directed against the CIT(A)'s order in confirming the action of the AO in initiating reopening proceedings under s. 147 of the Act and then in framing the assessment under s. 147 of the Act.

4. In the assessment order, it is stated by the AO that a survey under s. 133A of the Act was conducted at the business premises of the assessee on 18th Jan., 2005. Some books of account and other relevant materials were impounded under s. 133A(3)(ia) of the Act. From the audit report and books of account, it was revealed to the AO that the assessee was a running concern during the year relevant to the asst. yr. 1999-2000 but the assessee had not filed any IT return for the year under consideration. The AO further stated that in the asst. yrs. 1995-96 and 1996-97, the assessment was completed determining the income liable to be taxed. The AO further stated that no return of income for asst. yr. 1999-2000 as required under s. 139 of the Act was filed by the assessee. The AO therefore, selected the case for reassessment. After recording reasons, a notice under s. 148 of the Act was served upon the assessee on 29th March, 2006 after obtaining the necessary approval of the Addl. CIT vide his letter dt. 27th March, 2006. In response to the notice issued under s. 148 of the Act, the assessee filed the return of its income on 31st Aug., 2006. The AO then issued notice under ss. 142(1) and 143(2) on 29th Sept., 2006 along with questionnaire. However, nobody had attended before the AO on the various dates fixed for hearing. The AO then completed the assessment under s. 144/147 of the Act determining total income of the assessee at Rs. 7,01,530.

5. Being aggrieved, the assessee preferred an appeal before the learned CIT(A).

6. Before the learned CIT(A), the assessee had taken additional ground challenging the validity of the assessment proceedings initiated under s. 147 of the Act. It was contended by the assessee before the learned CIT(A) that the AO had erred in law and on facts in passing the assessment order under s. 147/144 of the Act without complying with the mandatory requirements as prescribed under ss. 147 to 151 of the Act with regard to the reopening of the case under s. 147 and framing of the assessment under s. 147/143(3) thereto. It was further contended that action of the AO in reopening of the case and framing the assessment under s. 147/143(3) of the Act was bad in law, illegal, unjustified, against the principles of natural justice and void ab initio.

7. The aforesaid additional ground taken by the assessee before the learned CIT(A) was admitted by him for consideration.

8. After considering the assessee's submissions and the facts of the case, the learned CIT(A) decided the additional ground against the assessee by observing and holding as under :

"7. I have perused the record. The AO has recorded following reasons for initiating proceedings under s. 147 of the Act :

'A close perusal of the records of this office reveals that the said assessee has not filed its return of income for the asst. yr. 1999-2000 as required under s. 139 of the IT Act. However, during the course of survey under s. 133A of the IT Act, 1961 at the said business premises of the assessee on 18th Jan., 2005, some books of account and other relevant material were impounded under s. 133A(3)(ia) of the IT Act, 1961. From a close perusal of the auditor's report dt. 13th Aug., 1999 for the year ending 31st March, 1999 and books of account with accompanying documents/ records duly impounded reveals that the business of the stated company was very much in existence. It is worth mentioning that as per the computer generated books of accounts examined during the course of survey the assessee has reflected profitability during the ensuring asst. yrs. 2003-04 and 2004-05 as details below :

It goes to establish that the assessee company was a going concern during the year relevant to asst. yr. 1999-2000. Also in the preceding asst. yrs. 1995-96 and 1996-97 incomes have finally been determined by the IT Department to be taxed as assessments completed.

Thus by virtue of the provisions contained in s. 139(1) of the IT Act, 1961, it was statutorily required to file its return of income/loss for the said asst. yr. 1999-2000. For the sake of reference, relevant provisions are reproduced hereunder :

'Sec. 139(1)—Every person—

(a) being a company or a firm or
(b) ………………

shall on or before the due date, furnish a return of his income or the income of such other person, during the previous year in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed.'

Even otherwise dwelling upon the deeming provisions contained in Expln. 2 to s. 147 of the IT Act which reads as under :

'Explanation 2 to s. 147—For the purpose of this section the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely,—

(a) Where no return of income has been furnished by the assessee although his total income or ……… during the previous year exceeded the maximum amount which is not chargeable to income-tax.'

Thus I have reason to believe that it is a fit case for invoking the provisions of s. 148 r/w s. 147 of the IT Act for the asst. yr. 1999-2000 and accordingly appropriate proposal in the prescribed manner is submitted to the Hon'ble Addl. CIT, Gurgaon for his kind approval.

The Addl. CIT has accorded the approval on 27th March, 2006 as under :

'I am satisfied on the reasons recorded by CIT (sic-AO) that it is a fit case for the issue of notice under s. 147 of IT Act.'

7.1 The assessee has relied upon the case of CIT v. Pradeep Gupta (supra) to prove that initial burden is on the AO that the income has escaped assessment. This case is not relevant as in the present case, the assessee has not filed the return of income and according to Expln. 2 below s. 147, it is a case of deemed escapement of income, since no return of income had been filed. The AO had observed that the assessee company was a going concern and that profit before taxation as per annual report for asst. yr. 2003-04 worked out to Rs. 77,36,989, as ascertained during survey operations.

7.2 The assessee has further relied upon decisions (supra ) to support that in reassessment proceedings only those amount can be added which formed part of the reasons recorded. These case laws are not relevant as in the present case reassessment proceedings have been commenced on the ground that the assessee has not filed its return of income. Thus there is no merit in the additional grounds raised and the same are dismissed."

9. Hence, the assessee is in further appeal before us.

10. The learned counsel for the assessee has submitted that it was the initial burden of the AO to show and establish that the assessee had a taxable income, which had escaped assessment, in the relevant assessment year by pointing out relevant and adequate material to support the same. He further submitted that when in the reasons recorded by the AO, the AO has not pointed out any material or evidence, on the basis of which, it could be said that the assessee had taxable income in the year under consideration, the reason recorded by him that the assessee was statutorily required to file its return of income/loss for the relevant assessment year, was without any basis. He further submitted that in the reasons recorded by the AO, he has referred to the provisions of s. 139(1) of the Act, which were not applicable to the asst. yr. 1999-2000 and therefore, his reasons to believe that it was a fit case for invoking the provisions of s. 148 r/w s. 147 of the Act for the year under consideration were misconceived and not based on correct provisions of s. 139(1) of the Act applicable in the asst. yr. 1999-2000. The learned counsel for the assessee further submitted that there were no tangible or relevant materials or reason to believe that income had escaped assessment within the meaning of s. 147 of the Act. He further submitted that the Addl. CIT has mechanically accorded the approval for issuing the notice under s. 148 without applying his mind to the reasons recorded by the AO, as in the light of the reasons recorded by the AO, no prudent man could come to a reasonable belief that income had escaped assessment within the meaning of s. 147 of the Act. He, therefore, submitted that the assessment proceedings initiated under s. 147 of the Act, are liable to be quashed. The learned counsel for the assessee has relied upon the following decisions :

1. Central India Electric Supply Co. Ltd. v. ITO [2011] 333 ITR 237/10 taxmann.com 169/202 Taxman 86 (Delhi) (Mag.)
2. CIT v. Gupta Abhushan (P.) Ltd. [2009] 312 ITR 166/178 Taxman 473 (Delhi); and
3. Shyam Sunder Kalra v. Dy. CIT [2010] 127 TTJ (Delhi)(UO) 116.

11. The learned Departmental Representative on the other hand, supported the learned CIT(A)'s order and reiterated the various facts' and reasons given by the learned CIT(A) in upholding the AO's action in initiating reassessment proceedings under s. 147 of the Act by issuing a notice under s. 148 of the Act.

12. We have heard both the parties and have carefully gone through the orders of the authorities below. We have deliberated upon the relevant provisions of law contained in that behalf. We have carefully perused the provisions of s. 147 of the Act. and find that s. 147 authorizes and permits the AO to assess or reassess income chargeable to tax, if he has reason to believe that the income for any assessment year has escaped assessment. The expression "reason" used in the phrase "reason to believe" means cause or justification. If the AO has cause or justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that income had escaped assessment. At the stage of issuing notice under s. 148 of the Act, it is not necessary for the AO to have established the fact for escapement of income but what is necessary is that there must be relevant material on which a reasonable person could have formed a requisite belief. In other words, the conclusive proof of escapement of income is not germane at this stage of initiating proceedings under s. 147 of the Act but the formation of belief must be on base or foundation or platform of prudence, which a reasonable person is required to apply. At this stage, the only question is whether there was relevant material, on which a reasonable person could have formed a requisite belief. Whether the materials would conclusively prove the escapement is not the concern at that stage. It is also well-settled that the reasons are required to be read as they were recorded by the AO. No substitution or deletion is permissible. No additions can be made to those reasons. No inference can be allowed to be drawn based on reasons not recorded. It is for the AO to disclose and open his mind through reasons recorded by him. He has to speak through his reasons. It is for the AO to point out cogent or tangible materials in the light of which a reasonable person could have formed a requisite belief that income had escaped assessment within the meaning of s. 147 of the Act. The reasons recorded by the AO provide the link between conclusion and evidence. The reasons recorded must be based on evidence. The law is well-settled that once the ingredients of s. 147 are fulfilled, the AO is competent in law to initiate the proceedings under s. 147 of the Act. In other words, the conditions precedent enumerated in the provisions of s. 147 of the Act are to be satisfied before initiating any proceedings contemplated under s. 147 of the Act. In the present case, the AO has initiated reassessment proceedings under s. 147 of the Act in the light of the reasons recorded by him. The reasons recorded by the AO have been reproduced by the learned CIT(A) in para 7 of his order, which has already been extracted hereinabove. The AO has stated that the assessee did not file its return of income for the Asst. yr. 1999-2000 as required under s. 139 of the Act. The relevant provisions of s. 139(1) of the Act on which reliance has been placed by the AO, have been extracted by the AO in the reasons recorded by him. The provisions of s. 139(1), as extracted by the AO in the reasons recorded provide that every person—(a) being a company or a firm; or (b) …………… shall on or before the due date, furnish a return of his income or the income of such other person during the previous year in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed. We have carefully gone through the provisions of s. 139(1) as amended from time to time. The provisions of s. 139(1) referred to by the AO in the reasons recorded by him were substituted by the Finance Act, 2001, w.e.f. 1st April, 2001. Sub-s. (1) of s. 139 was substituted by the Finance Act, 2001 w.e.f. 1st April, 2001, which reads as under :

"Sec. 139. Return of income.—(1) Every person—

(a) being a company or a firm; or
(b) being a person other than a company or a firm, if his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income-tax,

shall on or before the due date, furnish a return of his income or the income of such other person during the previous year in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed :

…………………."

Prior to its substitution by the Finance Act, 2001, w.e.f. 1st April, 2001, sub-s. (1) of s. 139 read as under :

"(1) Every person, if his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income-tax, shall, on or before the due date, furnish a return of his income or the income of such other person during the previous year, in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed."

13. On comparative reading of s. 139(1) as it stood prior to and after 1st April, 2001, it is clear that for asst. yr. 2001-02 and subsequent years, all companies are required by the statute to file a return of income irrespective of the fact whether company's total income exceeded maximum amount which is not chargeable to tax or not. In other words, whether it is a return of income or of loss, every company is required to file a return of income under s. 139(1) of the Act from the asst. yr. 2001-02 onwards. All the firms are also now required by the statute to file a return of income, whether it is return of income or of loss from the asst. yr. 2006-07 inasmuch as the word "or a firm" has been inserted after the word "company" in sub-s. (1) in cl. (a) or (b) of s. 139 by the Finance Act, 2005 w.e.f. 1st April, 2006. However, prior to asst. yr. 2001-02, all the persons, including the company and/or a firm, were required by the statute to file a return of income under s. 139(1) of the Act if their total income exceeds the maximum amount which is not chargeable to tax except certain exceptions provided in the section itself, which are not relevant to the present case.

14. On a plain reading of s. 139(1) of the Act, as it stood prior to 1st April, 2001, it is clear that every person, if the total income in respect of which he was assessable under this Act during the previous year exceeded the maximum amount, which was not chargeable to income-tax, was required to file a return of such income on or before the due date in the prescribed form and manner. Under the provisions as it stood prior to 1st April, 2001, there was no distinction between a company or a firm and other assessee with regard to their liability to file a return of his income on or before due date in the prescribed form and manner provided the total income, in respect of which he was assessable under this Act during the relevant previous year, exceeded the maximum amount which is not chargeable to income-tax. However, after substitution of s. 139(1) of the Act by the Finance Act, 2001 w.e.f. 1st April, 2001, the provisions of s. 139(1) provide that every company is required to file a return, whether it is a return of income or loss, or in other words, whether its income may exceed the maximum amount, which is chargeable to income-tax or not. The scope and effect of the substitution by the Finance Act, 2001 has been explained by the Board in Circular No. 14 of 2001, dt. 22nd Nov., 2001 [2002] 172 CTR (St) 13 : [2001] 252 ITR (St) 65 vide paras 65.1 and 65.2 as under :

"65. Compulsory filing of returns by companies—65.1 Under the existing provisions contained in sub-s. (1) of s. 139 of the IT Act, every person, if the total income, in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income-tax, is required to file a return of such income on or before the due date in the prescribed form and manner. It has been observed that a number of companies have not been filing returns on the plea that they have not earned any income. The Act, therefore, amends s. 139 (1) to provide that every company is required to file a return whether it is a return of income or of loss.

65.2 This amendment takes effect retrospectively from 1st April, 2001, and will, accordingly, apply in relation to the asst. yr. 2001-02 and subsequent years."

15. In the present case before us, the AO has recorded the reason for initiating proceedings under s. 147 of the Act on the belief that the assessee was required to file its return of income/loss under s. 139(1) of the Act as the business of the assessee company was very much in existence in the relevant year. The AO also stated that the assessee company was a going concern during the year relevant to asst. yr. 1999-2000 and, thus, by virtue of provisions contained in s. 139(1) of the Act, the assessee was statutorily required to file its return of income/loss for the said asst. yr. 1999- 2000. In forming a belief that the assessee company was statutorily required to file its return of income/loss for the year under consideration, the AO has applied the provisions of s. 139(1) of the Act, which are effective from the asst. yr. 2001-02. For the said reasons recorded by the AO, the learned Addl. CIT has accorded approval by satisfying that it was a fit case for the issue of notice under s. 147 of the Act. Since the AO has applied the provisions of s. 139(1) of the Act, which are effective from asst. yr. 2001-02, in support of his reason to believe that the assessee was statutorily required to file its return of income/loss, it becomes clear to us that the AO has initiated proceedings under s. 147 of the Act on non-existent ground as the provisions of s. 139(1) of the Act, which were applied by the AO, were not in force in the relevant asst. yr. 1999-2000. The learned Addl. CIT has also failed to take note of this fact that the provisions of s. 139(1) referred to by the AO in the reasons recorded by him, were not applicable to the cases of company in the asst. yr. 1999-2000. We, therefore, hold that it is the case where the AO has not applied his mind to the relevant provisions of s. 139(1) of the Act applicable in the asst. yr. 1999-2000 and has wrongly applied the provisions of that section, which are applicable from asst. yr. 2001-02 onwards for reopening the assessment under s. 147 of the Act by entertaining a belief that the assessee was statutorily required to file its return of income/loss for the relevant year.

16. The AO has also made a reference to Expln. 2 to s. 147 of the Act but has failed to point out any tangible material that the assessee's income in asst. yr. 1999-2000 had exceeded the maximum amount which is not chargeable to income-tax and therefore, reference to Expln. 2 to s. 147 is also not based on any relevant material and there is no live nexus between the material on record and reasons recorded by the AO.

17. In the reasons recorded, the AO has made a reference to the survey proceedings conducted under s. 133A of the Act at the business premises of the assessee on 18th Jan., 2005, during the course of which some books of account and other relevant material were impounded under s. 133A (3)(ia) of the Act. The AO had perused the auditor's report dt. 12th Aug., 1999 for the year ending 31st March, 1999 and books of account and documents/records impounded, which had revealed to him that the business of the assessee company was very much in existence. However, he has failed to point out as to whether from the perusal of the auditor's report and books of account, the assessee's total income had exceeded the maximum amount which is not chargeable to tax so as to require the assessee under s. 139 of the Act, as it then stood, to file the return of income. The audit report as well as books of account for the asst. yr. 1999-2000 were before the AO at the time when the reasons were recorded, but, in the reasons recorded the AO had nowhere made a reference, for the reasons best known to him, to any particulars or materials found recorded in the books of account or in the audit report in forming a belief that income of the assessee company had escaped assessment for the asst. yr. 1999-2000. Instead, the AO has relied upon the facts and figures of the asst. yrs. 2003-04 and 2004-05, which are not at all relevant to form a requisite belief that income had escaped assessment for the asst. yr. 1999-2000 without establishing any link or nexus between the facts and figures pertaining to the asst. yrs. 2003-04, 2004-05 and that of the asst. yr. 1999-2000, which is under consideration. The AO has also relied upon the assessment completed for the asst. yrs. 1995-96 and 1996-97, which are also not relevant for the purpose of forming a requisite belief that income had escaped assessment in the asst. yr. 1999-2000.

18. In the light of the discussions made above, we therefore, hold that there was no relevant or tangible material pointed out by the AO in the reasons recorded, on the basis of which AO could have formed a requisite belief that the income had escaped assessment for the asst. yr. 1999-2000 within the meaning of s. 147 of the Act. We further hold that the AO has not mentioned any relevant material or information relatable to the asst. yr. 1999-2000 in the reasons recorded, which could indicate any escapement of income for the asst. yr. 1999-2000. We, therefore, hold that the notice under s. 148 issued by the AO in the light of the reasons recorded by him is bad and invalid in the eyes of law and thus, the proceedings initiated by the AO under s. 147 of the Act are hereby quashed. Consequently, the assessment made by the AO under s. 147 of the Act is cancelled.

19. Since the very assessment made by the AO under s. 147 of the Act stands cancelled, various other grounds relating to the various additions made by the AO and further confirmed by the learned CIT(A) and disputed by the AO in this appeal, have become redundant at this stage. We, therefore, need not decide the same and they are dismissed as infructuous.

20. Now, we shall come to the assessee's appeal pertaining to the asst. yr. 2000-01.

21. In this assessment year, the AO has initiated reassessment proceedings under s. 147 of the Act and issued notice under s. 148 of the Act on 29th March, 2006. The reasons recorded by the AO In this assessment year are as under :

"A close perusal of the records of this office reveals that the said assessee has not filed its return of income for the asst. yr. 2000-01 as required under s. 139 of the IT Act. However, during the course of survey under s. 133A of the IT Act, 1961 at the said business premises of the assessee on 18th Jan., 2005, some books of account and other relevant material were impounded under s. 133A(3)(ia) of the IT Act, 1961. From a close perusal of the auditor's report dt. 22nd June, 2004 for the year ending 31st March, 2000 and books of account with accompanying documents/ records duly impounded reveals that the business of the stated company was very much in existence. It is worth mentioning that as per the computer generated books of accounts examined during the course of survey the assessee has reflected profitability during the ensuing asst. yrs, 2003-04 and 2004-05 as detailed below :

It goes to establish that the assessee company was a going concern during the year relevant to asst. yr. 2000-01. Also in the preceding asst. yrs. 1995-96 and 1996-97 incomes have finally been determined by the IT Department to be taxed as assessments completed.

Thus by virtue of the provisions contained in s. 139(1) of the IT Act, 1961, it was statutorily required to file its return of income/loss for the said asst. yr. 2000-01. For the sake of reference, relevant provisions are reproduced hereunder :

'Sec. 139(1)—Every person—

(a) being a company or a firm or
(b) …………………

shall on or before the due date, furnish a return of his income or the income of such other person during the previous year in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed.'

Even otherwise dwelling upon the deeming provisions contained in Expln. 2 to s. 147 of the IT Act which reads as under :

'Explanation 2 to s. 147 : For the purpose of this section the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely,—

(a) Where no return of income has been furnished by the assessee although his total income or …………… during the previous year exceeded the maximum amount which is not chargeable to income-tax.'

Thus I have reason to believe that it is a fit case for invoking the provisions of s. 148 r/w s. 147 of the IT Act for the asst. yr. 1999-2000 and accordingly appropriate proposal in the prescribed manner is submitted to the Hon'ble Addl. CIT, Gurgaon for his kind approval.

The Addl. CIT, Gurgaon has accorded the approval vide letter No. 2747 dt. 27th March, 2006."

22. On perusal of the reasons, we find that reasons recorded in this asst. yr. 2000-01 are identically worded except change in the assessment year. In this year also, the AO has formed a requisite belief that the assessee was required under s. 139 of the Act to file its return of income/loss for the asst. yr. 2000-01 in the light of the provisions of s. 139(1) of the Act, which were effective from the asst. yr. 2001-02. The AO has also relied upon the profit pertaining to the asst. yrs. 2003-04 and 2004-05, which are not relevant to the asst. yr. 2000-01 under consideration. The AO has also relied upon the assessment order completed for the asst. yrs. 1995-96 and 1996-97, which are also not relevant to the asst. yr. 2000-01. Therefore, for the reasons given by us in asst. yr. 1999-2000 vide this common order, the assessment completed by the AO under s. 147 of the Act for this asst. yr. 2000-01 is also cancelled inasmuch as the reopening of the assessment under s. 147 of the Act is bad in the eyes of law. In this assessment year also, we need not decide the other grounds regarding the various additions made by the AO in the assessment for the reason that assessment made by the AO under s. 147 of the Act itself stands cancelled.

23. In the result, both these appeals filed by the assessee are allowed.